Aging Car Population Keeping AutoZone Fundamentals Strong

Argus’ Christopher Graja continues to see “strong industry fundamentals, which are highlighted by an aging car population, low gasoline prices and increasing miles driven per car.”

Graja reiterated a Buy rating on AutoZone, Inc. (NYSE: AZO), with a price target of $875.

Aging American Fleet

The analyst mentioned that the auto parts sector was largely insulated against Internet competition, due to in-store services, relationships with parts suppliers and established delivery to commercial customers.

However, AutoZone is expected to improve its own online offering.

According to the Argus report, statistics show that the average age of vehicles in America is more than 11 years, which means they are no longer under warranty and required extra maintenance.

Miles driven increased 3.5 percent in 2015, which AutoZone stated was the largest increase in over a decade. Miles driven continued to increase in January and February 2016.

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On the other hand, the price of unleaded gasoline is still fairly low, at about $2,25 per gallon, although the price rose slightly in 3Q.

“Relatively low gas prices should enable drivers to put even more miles on their mature vehicles. Low prices at the gas pump should also leave consumers with a little extra discretionary income that can be spent on repairs,” Graja explained.

Improvements At AutoZone

The analyst expects AutoZone to focus on improving inventory availability in FY16 in order to drive sales. The company is likely to do this through higher inventory at individual stores, adding more large-format “Hub” stores to enhance availability in the broader, regional markets and increasing replenishment to individual stores.

“Despite the added cost of more inventories, deliveries, and warehousing, management expects the initiative to deliver significant internal rates of return. We expect management to add services for commercial customers to more stores and to improve recently-launched commercial programs as they mature,” Graja added.